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Momentum Builds for Global Crackdown on Tax Loopholes

International policymakers are looking for ways to rein in tax arbitrage, the practice of exploiting cross-border differences in tax laws, though companies have said they shouldn’t act as ‘global tax policemen.’

Angel Gurría, Secretary General of the Organisation for Economic Co-Operation and Development, recently urged the world's leading economies to confront the consequences of tax arbitrage. (SAUL LOEB/AFP/Getty Images file photo)

In a sign of growing anxiety about tax competition that costs governments billions of dollars a year, international economic policymakers are exploring the need for a global crackdown on tax loopholes.

Experts at the Organization for Economic Co-Operation and Development are examining tactics that companies employ to exploit different tax rules among countries and are assessing past efforts to rein in the practice known as tax arbitrage.

Angel Gurría, the OECD secretary-general, recently urged the world’s biggest economies to consider how “to limit the scope for gaming the system with multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage.”

The OECD is worried about the impact of tax arbitrage on competition, transparency and fairness, as well as lost revenue.

Earlier this year, Jeffrey Owens, the OECD's top tax official, called for cooperation in dealing with “the most costly and destabilizing instances of international tax arbitrage,” which he said can lead to “lost government revenues, wasted resources, increases in borrowing to finance the arbitrage and increased complexity.”

Past efforts to crack down on arbitrage have been controversial, with big companies accusing governments of trying to act as “global tax policemen.” In 2001, the business-friendly Bush administration criticized an OECD initiative to address what it termed “harmful tax practices,” saying it interfered with the right of countries to structure their own tax rules.

In December 2008, after the financial crisis struck, the Internal Revenue Service signaled a shift in attitude. IRS Commissioner Douglas H. Shulman noted in a series of speeches over the following year that a “dizzying global environment” in tax arbitrage was challenging regulators.

One of the speeches came at a meeting of the OECD, whose 34 member states include Europe’s strongest economies, the United States, Japan and South Korea.

“All countries with real economies and real tax systems have a shared interest in reducing the kind of arbitrage that makes income disappear from the tax systems where the economic activity is taking place,” Shulman told an audience at George Washington University in 2009.

“Tax arbitrage” encompasses a wide range of complex practices that companies employ to achieve tax credits or savings, often by shifting income among subsidiaries in different countries.

Arbitrage generally has mushroomed in the increasingly globalized economy, although it dimmed somewhat in the wake of the 2007-08 global financial crisis, which hit international capital flows.

Still, an appetite for aggressive tax planning remains.

Earlier this year, the U.K. treasury announced laws to close down “an aggressive tax-avoidance scheme” of “contrived circular transactions” by a dozen large businesses unidentified by the government. Hundreds of millions of pounds of tax revenue were at risk, the government said in a news release at the time.

For confidentiality reasons, the U.K. doesn’t disclose taxpayer identities or offer details about such cases.

The OECD last year highlighted its fears about the ability of banks to use losses accumulated since the financial crisis—an estimated $700 billion, according to the OECD—as a tool for aggressive tax planning.

Among the concerns is “loss trafficking”—schemes in which losses are sold to other companies to reduce their tax payments. In an August report, the OECD also warned about aggressive tax planning that involves the carrying forward of “vast” corporate losses as high as 25 percent of the gross domestic product of some countries.

The OECD has also said that multibillion-dollar deals aimed at generating foreign tax credits encouraged a general buildup of leverage and led to tax distortions.

The concern was raised in a 2009 report by then-adviser Geoff Lloyd that pointed to the complex structures involving low-cost loans at the heart of some tax-arbitrage arrangements. Such financing provided “an unintended subsidy for cheap cross-border lending at the expense of the lender’s home state exchequer,” according to the report.

Speaking at a Brussels conference in March, he said: “Tax was not among the root causes of the financial crisis. But tax measures may contribute in exacerbating non-tax incentives to financial instability in the form of greater leverage, greater risk-taking and to a lack of transparency.”

20 comments

I mean, we all know how this is going to end: Lobbyists march on Washington and the OECD declares mission accomplished without changing a dime of multinational corporate tax revenue except maybe providing them with a few more loopholes.

But they need to do something, otherwise it’s transparent. And I assume it’s going to be done to us, since there is no public lobby.

If it were the Bush administration, I’d assume it was all a gambit to force banks around the world to disclose where we’ve put our money. Obama’s team doesn’t seem better, but that doesn’t seem their style, so what are they really after?

I am glad you are talking about these issues, related to Corporations use of International tax arbitrage to game the system. These actions, and the perceptions in the populace of the special considerations and loop holes for Corporations not available to the middle class taxpayer is seriously undermining the entire tax system. People become more and more cynical, and don’t see any justice or fairness any more in how they are individually being taxed.

What is disappointing to me a bit, recognizing that you can’t cover everything in one story, is that there is no mention of two significant tax evasion efforts actions emanating from the IRS right now.

These are having or will have significant impacts on middle class individuals and not just the Big Financial Corporations who have lots of work to do to be compliant. In the “Big Picture,” I think that is all part of this same story, and John asks a good question…

” What is the end game?”

One effort which just closed, is the Voluntary Disclosure programs that were designed to catch Big Tax cheats who use secret Swiss like Foreign Accounts to hide income. The collateral damage impacts of this program are being widely reported in Canada, but no where else. The US media is asleep even though the Tax Practitioner community understands this very well. These negative results, are in the unintended consequence column. Here is the human face of what is happening.

The second issue is the coming of FATCA, and the implications that has for all Financial Institutions in the World. The IRS is attempting to make them all tax collectors for the IRS. Right now only 25% are aware of these new requirements according to this report.http://bit.ly/o45qoO

So, while the OECD talks about closing Corporate loops and stopping the arbitrage, in the meantime the IRS is acting unilaterally and causing a lot of misery which may not be really improving compliance in any statistically meaningful way. Why is that?

I would contend, that is the draconian penalty structure of current VD programs associated with an administrative form, called an FBAR, is designed for one target while hitting another. It is not really an amnesty, in the true sense of the word. It is a revenue grab that is extra territorial, and it is pushing other groups of smaller middle class immigrants and expat taxpayers further into the non compliance category.

However, other countries like New Zealand, seem to be more passive and resigned in their responses to FATCA. http://bit.ly/nOJsoh

So for me, the BIG question is this. In light of these discussions amongst OECD counties about Corporate tax arbitrage and how to limit the scope of gaming, how are they going to respond to the current unilateral actions of the US IRS?

What do you think Vanessa?

If you want to ponder it more, you might consider checking out American Citizens Abroad who have done a lot of excellent work in this area. Here is their most recent release.http://bit.ly/nGPQAs

Can you clarify this a bit for me, Marvin? The articles on the subject are—perhaps necessarily—telling the emotional side of the story. But trying to see past that, it looks like a bunch of American citizens who assumed that unenforced laws didn’t apply to them and are now faced with enforcement.

Understand that I’m sympathetic that it’s causing hardship, and probably have a few friends caught up in something like this. I also hate the idea of mandated “voluntary disclosures” (under penalty of perjury) that we all face. But all those articles read to me as, “well, everybody speeds, so I shouldn’t get a ticket for it.” Is there more to it than that?

As to my “end-game” reference, my point was that there must be a goal for this “loophole-closing.” It can’t be to actually tax corporations, because that’ll never happen. It probably isn’t surveillance, because that’s already in place. It can’t be just collecting taxes, because even the maximum penalties are peanuts compared to what we spend. And governments don’t go to the trouble of overhauling a system and involving other countries unless there’s something important to somebody.

Those involved in FBAR issues should (if not already) know that penalties are under US Title 31, not Title 26 - which eliminates Tax Court access. The normal course of IRS appeals applies EXCEPT you cannot skip Appeals 1 by submitting a TC petition and have another “shot” at Appeals. In other words, Examinations will have full access to everything you submit in Appeals 1. If Appeals does not waive penalty, you pay then file in another court.

And bankruptcy may not waive FBAR penalties.

As Marvin has pointed out, average taxpayers are at times caught in the snare of criminal enforcement. Document any investment where you are asked to wire funds to a non-US location and clarify ownership of the recipient account and your lack of control or signature access. And remember that a debit card or equivalent is a financial account!

I have seen the IRS assert that such a transaction by an average US taxpayer, was a foreign financial account under taxpayer control. And the standard of evidence used by Examinations was “since such transactions are typically obscure and clouded, we do not have to provide evidence of control.” When asked to provide a logical connection between purported facts and the assessment conclusion, the response was “we don’t have to, this is business”.

Anyone with FBAR scrutiny would do well to ascertain if the IRS persons involved are assigned to an “AT” or abusive transactions team. If so, be prepared. If not, i.e. a non-special team Revenue Agent is pursuing an exam, and if no indicators of abuse such as inappropriate use of trusts, listed transactions, etc exist, then my experience shows the IRS simply wants to see the FBAR form filed and has no further concern - the average examiner would rather not find an unfiled FBAR.

If you have signatory access but not control of a foreign account, take advantage of the November 2011 extension and get all disclosures filed. I have yet to see FBAR filings create scrutiny - but then again my clients are not attempting to hide anything. Life is so much easier that way!

It became clear to me in reading many of these well written posts that I am a simple guy and naive in such matters. I do question the assertion by some that FBAR snares average taxpayers, perhaps someone could elaborate on what you see as constituting an average taxpayer and how they are penalized or persecuted. In the circles that I move in most people are treading water to survive and are lucky to have money in a domestic checking account let alone have or have any concerns about foreign accounts or investments. As Fred observes people with nothing to hide have nothing to fear other than the experience of being under scrutiny. I was once audited by the IRS, not a pleasant experience given the hostility of the agent but with nothing to hide the matter was successfully resolved.

I find the IRS approach (FACTA) quite American, if you can get others to do your work and you reap the rewards it lowers your collection cost. It is another form of outsourcing, something American capitalism excels at.

Enjoyed your observation on American ingenuity - we admire the progress of private enterprise yet gasp when US gov’t follows their example!

“Average” taxpayer is subjective. To persons making millions, the following are average - doctors, other professionals and successful small business owners with AGI say above $175K to $500,000. As some of these experience “excess” funds they invest, at times overseas. They tend to be new to US reporting req’ts for foreign activity. Combine the decision to invest foreign with that investment turning into a ponzi scheme (like Cash 4 Titles) under SEC scrutiny, with a list of participants sent to an IRS abusive transactions team, and suddenly the oblivious M.D. who just lost thousands in a scam is being looked at by the IRS as if she/he had potential of being a tax evader.

If you think the US gov’t tax collection system is a benign, fair system, take some time to research. Start with http://www.unclefed.com/TxprBoR/index.html. Did you note my comment previous as to the IRS supervisor who said “this is business”? Do you understand what it means when the IRS declines presenting sufficient evidence of liability and instead assesses tax because they have a chance of collection? That is their business - maximum collection.

In offset, the IRS has a functional appeals program, fairly defined penalty abatement rules, and we have access to courts at affordable costs. Much better than many other countries. I would still rather deal with the IRS than some other jurisdictions.

Well, if you are still reading here, you asked me a question, so let me try to clarify a bit more for you.

You ask..
“well, everybody speeds, so I shouldn’t get a ticket for it.” Is there more to it than that?

There is absolutely more to it than that.

The emotional side of the story is important as it represent the distress of those being affected by a program not designed for them, but they are caught in the trap just the same because they want to be compliant, and there is no easy off ramp once they are in the process.

The VD program represents a misguided effort that has been unable to distinguish between egregious and benign failures. A program designed to catch Whales, catches minnows instead, and applies the same penalty (in the name of uniformity) on both.

So, if you are a person engaged in a UBS evasion scheme, your penalty is the same as the middle class expat or immigrant who was just jay walking. Great deal for the UBS evader, but terrible deal for the jay walker. The minnow voluntarily turned themselves in and their crime was they either didn’t file a completely worthless form, called an FBAR, or because they just weren’t paying attention to the fact that the US extends its tax dominion over you based upon your citizenship, and not residency like every other civilized OECD country in the world.

Those are compliance errors, for sure, and many joined the VD programs because they wanted to become compliant once they heard they were in error. They are not by nature tax evaders, they just weren’t reporting correctly. The IRS has not been able to make a distinction, between real cheats and minor failures, and the process has become a 2 year grind for some, with significant financial and emotional pain for relatively non substantive tax under reporting.

Maybe you didn’t know this, but surprise surprise, if you are an immigrant to the US, you are taxed more on the money left in your bank account in your home country than you are in the US, and if you are an expat, you too are taxed more in the new country of your residence than the US. If these were tax evasion crimes they weren’t very smart. They were crimes more of bad administration or stupidity, but the IRS is quite happy to take 25% of their highest aggregate accounts and assets in the foreign country just the same as if they were engaged in the UBS evasion schemes. That means 25% of the value of your retirements homes, cars, other foreign assets and all normal checking and savings bank accounts for living expense for these simple failures.

Anyway, no one in American press is interested in this story has they have already bought into the IRS success story press releases they roll out in the media. But let me assure you, the VD programs are doing some serious harm to middle class people. And others who didn’t join, have a good example why you don’t want to be compliant, if this is how you are treated. Actually, I think the program is counter productive to a compliance objective.

...and when I read what Fred has said, I think he gets it totally. I bet he is a tax attorney, so he knows of what I speak.

That’s mostly what I was looking for, Marvin, thanks. If I understand you correctly (and I may not—I’m boring enough that my taxes take about fifteen minutes to file), it’s the disproportionate effects of the “fair” penalties (which is why I groan every time I hear people suggesting a flat tax) and the general abuse by the IRS.

What’s the term, strict liability? Something for which no excuse, lack of harm, benefit, or difficulty of compliance lessens the weight of the crime in the law’s eyes? We’re getting far too many of those for my tastes.

Btw, I am non partisan. I am middle class. Income is near the US median. Not an anti- tax nut case.

And, yes, there are “far too many of these”, as you say. This recent Voluntary Disclosure (VD) effort is an especially egregious example of this article. “As Federal Crime List Grows, Threshold of Guilt Declines.” http://on.wsj.com/obm951

The whole untold VD story is about “proportionality” with pleas for some fairness and grace. Now admittedly, there isn’t such a concept in tax law, but there needs to be some measure of that for “good and just” governance.

That is what is missing here.

The IRS, bless their poor little bureaucratic souls, didn’t foresee (or cynically speaking, didn’t care about) the unintended consequences and collateral damage of a poorly designed program. They have created an unjust system designed to bring in Max revenues, consequences be damned! And, of course, there is no basic econ 101 analysis of cost vs benefit. They don’t think like that!

Current IRS VD programs are directed toward “Foreign Tax” evasion. I can understand why, given the magnitude of the UBS tax evasion schemes that were peddled to the Rich Whales. I get it.

However, the IRS seems incapable of designing a program that is narrow in its target (Whales) while encouraging compliance of benign offenders (Minnows) without resorting to penalties which are the equivalent of using hammers to kill flees! They are hunting for bank robbers while shooting jay walkers with the same shotgun.

They don’t get it! That is what is so discouraging.

Institutionally, is seems, once they start down a track, it is impossible for them to admit errors, change course, or make any fundamental adjustments. They may slowly tinker around the edges, a little technical fix here, remove a rule there, or create a new technical threshold, but they won’t deal with the Big structural Issues, IE, they continue to waste time and resources on Minnows who were not the target of the programs they designed. They are causing a lot of damage and pain to the wrong class of small offenders, and not accomplishing a compliance objective.

That is just not very smart.

Their marketing out reach program of choice is FEAR. They threaten criminal prosecution to get folks to “voluntarily” come forward, with the strong threats against normal quiet disclosures. They apply a HUGE “one size fits all” penalty regime for the simple failure to file an administrative FBAR form if it is associated with even minor income tax failure. There are no de minimis rules. So $1 or $1M of tax failure, it doesn’t matter.

Now, they claim success with $2.7B collected, of what “they say” is $100 billion “lost to the Treasury” as being hidden overseas. This 2.7% recovery isn’t much of a success story. Kinda belies the rhetoric.

For that $2.7B collected, what portion is past taxes due, and what portion is the “DRACOIAN” penalties? Don’t know. They don’t say.

Neither do they answer the most basic targeting question. What is the Minnow to Whale ratios in the 30,000 successes they put out for the press to repeat?

Further, what is compliance success? What does 30,000 mean in the context of the Universe that “should” fill out that stupid little FBAR form, that has no enforcement value, expect that it can be used to levy over-the-top penalties. The answer might not fit the “success” narrative either. < > 10% ? I don’t know. You would think the Press would ask. But, No!

345,000 filers in 2008. What is it now? How many should it be?

And now for Irony: Congress, as a follow on to the VD program(s), in 2010 passed FATCA. This charges the IRS with the task of making every financial institution in the world, an IRS tax collector!!! Big penalties for non compliant Banks. The squeals are deafening, except in the US media.

And, where is the largest amount of world wide money hidden for tax evasion purposes? Yup! Right here in the good ole US of A. Not overseas!!!

So, now, the IRS is “unilaterally” trying to get US banks to report interest paid to non US residents back to their home (foreign) countries. It makes a certain logical sense given our attacks on Swiss bank secrecy and the FATCA legislation.

Anyway, I will stop here. Don’t want to be seen as another raving nut case out here in the ether :-)

If the subject interests you, more info posted below from ACA. This has a narrow focus of 6.2 million Expats, but let me assure you that many of these same issues apply to millions of immigrants in America.

John,
Over the weekend, I posted a little more regarding your comment, “We’re getting far too many of those for my tastes.”. It is under moderation control, probably because I added a couple links, which I tried to deactivate, but it is still waiting for them to look at it and clear it. Hope it helps you understand more about how IRS programs are created and administered (poorly in my estimation). If it doesn’t show up in another day, I will resend and take the links out and just provide google key words for you to look for, if the subject still interests you. Maybe it won’t . Cheers

Thanks John…
I will modify it and re-post later today….
Keep your eye on what is happening in Canada…
Google this story…. I won’t provide a link, as that sends it to Moderation, and I don’t think Propublica has a quick process for dealing with that…

This from the Telegraph Journal..
Headline… “U.S. tax net even affects premier”

Yes, there are “far too many of these”, as you say. This recent IRS Voluntary Disclosure (VD) effort is an especially egregious example of what the WSJ describes in this article Google this: “As Federal Crime List Grows, Threshold of Guilt Declines.”

The whole untold VD story is about “proportionality” with pleas for some fairness and grace. Now admittedly, there isn’t such a concept in tax law, but there needs to be some measure of that for “good and just” governance.

That is what is missing here.

The IRS, bless their poor little bureaucratic souls, just didn’t foresee (or cynically speaking, didn’t care about) the unintended consequences and collateral damage of a poorly designed program. Thus, they have created an unjust system designed to bring in Max revenues, consequences be damned! And, of course, there is no basic economics 101 analysis of cost vs benefit. They just don’t think like that!

Current IRS VD programs were directed toward “Foreign Tax” evasion, and I can understand why, given the magnitude of the UBS tax evasion schemes that were peddled to the Rich Whales. I get it.

Read how the Justice Department describes the effort. Add www. to this: justice.gov/tax/offshore_compliance_intiative.htm

However, the IRS seems incapable of designing a program that is narrow in its target (Whales) while encouraging compliance of benign offenders (Minnows) without resorting to penalties which are the equivalent of using hammers to kill flees! They are hunting for bank robbers while shooting jay walkers with the same shotgun.

They don’t get it! That is what is so discouraging.

Institutionally, is seems, once they start down a track, it is impossible for them to admit errors, back up, change course, or make fundamental adjustments. They may slowly respond around the edges, a little technical fix here, remove a rule there, or create a new technical threshold, but they won’t deal with the Big Issues, IE, they continue to waste time and resources on people who were not the target of the programs they designed. They are causing a lot of damage and pain to the wrong class of small offenders, and not accomplishing a compliance objective. Look at the all the Canada stories. I think it makes my point.

That is just not very smart.

Their marketing out reach program of choice is FEAR. They threaten criminal prosecution to get folks to “voluntarily” come forward, with the strong threats against normal quiet disclosures. They apply a HUGE “one size fits all” penalty regime for the simple failure to file an administrative FBAR form if it is associated with even minor income tax failure. There are no de minimis rules. So $1 or $1,000,000 of tax failure, it doesn’t matter.

Now, they claim success with the $2.7B collected, and yet “they say” there is $100 billion “lost to the Treasury” as being hidden overseas. This 2.7% recovery rate isn’t much of a success story. Kinda belies the rhetoric.

And, for that $2.7B collected, what portion is past taxes due, and what portion is the “DRACOIAN” penalties? Don’t know. They don’t say.

Neither do they answer the most basic targeting question. What is the Minnow to Whale ratios in the 30,000 success numbers they put out for the press to repeat?

Further, what is compliance success? What does 30,000 mean in the context of the Universe that “should” fill out that stupid little FBAR form, that has no enforcement value, expect that it can be used to levy over-the-top penalties. The answer might not fit the “success” narrative either. < > 10% ? I don’t know. You would think the Press would ask. But, No!

345,000 filers in 2008. What is it now? How many should it be?

And now for Irony: Congress, as a follow on to the VD program(s), in 2010 passed FATCA. This charges the IRS with the task of making every financial institution in the world, an IRS tax collector!!! Big penalties for non compliant Banks. The squeals are deafening, except in the US media.

And, where is the largest amount of world wide money hidden for tax evasion purposes? Yup! Right here in the good ole US of A. Not overseas!!!

So, now, the IRS is unilaterally trying to get US banks to report interest paid out to non US residents back to their home (foreign) countries. It makes a certain logical sense given our prosecution of Swiss bank secrecy and the FATCA legislation.

However, now Congress is now trying to stop this. Ironically funny, eh?

Google: Congressman Tells IRS to Back off on Bank Disclosures

Anyway, I don’t want to be seen as another raving nut case out here in the ether, so will stop here. I am just a middle class, non partisan guy with income in the median range.

John,
Take your time, and interesting discussion you are having on the other “check box” story. At least, I assume that is you.

Hope you get time to google and read those pieces I referenced you to… These Canada stories are really a plea for what is going wrong with IRS efforts… I see Global Post is finally picking up the story. Maybe someday Propublica will look into it..

Safeguard the public interest

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